Solow Growth Model Meets Data -This is a case study for the Solow growth model w

Question

Solow Growth Model Meets Data -This is a case study for the Solow growth model with population growth and technological progress as seen in class. We will look at how does the Solow growth model perform in predicting the per-capita income growth rate. The simulation results are all provided Here is the U.S. per-capita GDP growth rate from 1950-2005- the same dataset you have in Question 1, which we find that the average growth rate is 2%. U.S. per-capita real GDP growth rate 0.08 0.06 0.04 0.02 0.02 0.04 associates-Paph and Tung of Kenny& Co. -has derived the necessary capital accumulation equation and growth rate equations for you. The production function is given by Y -A¡KÇL!*-notice how the technology parameter, At, is multiplied. The per-capita capital stock is kt Kt/Lt, and the per-capita production function is

Explanation / Answer

a. The Solow model simulated data shows that growth rate of U.S per capita GDP is following a downward trend. It has been constantly declining from 1952 to 2004. However, the downward sloping line is a smooth continuous line without fluctuations. However, the actual data line shows that there were many fluctuations in the value of per capita GDP growth rate of the United States.

b. Solow growth model predicts that low savings rate in the economy lead to slowdown in the economic growth of the country. Also, low technological progress has led to falling growth rate of the economy.

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